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The states' fiscal reform initiatives incorporate a variety of approaches to address accountability concerns, enhance financial flexibility, and achieve better performance. Financial arrangements--payment mechanisms, risk sharing, and risk management--attempted to redirect resources, encourage comprehensive services, and serve more children and families with the same funding levels as under the previous financial arrangements. The initiatives varied in the extent to which financial risk was transferred to private organizations, but most hoped to achieve better outcomes or cost savings through relying on contractors for much of the work that once was the responsibility of public agencies. In general, it is not yet known whether better outcomes were actually achieved by the initiatives. Cost savings were rare. Several initiatives provided financial rewards for contractors that achieved outcome standards or improved their performance and imposed penalties for contractors that did not.
Some initiatives reported concerns about potential or actual conflicts between fiscal and treatment considerations. Indeed, nearly all initiatives had or were working toward mechanisms for monitoring contractor performance and outcomes to prevent decisions that reduced costs by reducing treatment effectiveness. Many emphasized the importance of balancing the pressure to reduce costs, or to do more with the same amount of money, with an emphasis on improving child and family outcomes. As one state child welfare administrator said: “Privatization is a double-edged sword. We must never lose sight of our mission--to protect kids, not to save money.”
Traditionally, public child welfare systems’ payment arrangements with private-sector service providers have been fee-for-service. Payments depend on both the type and the amount of service delivered. Embedded in this system, it has been claimed, is a perverse incentive for providers to deliver more reimbursable services than are needed or to prolong treatment beyond what is necessary. The crux of the argument against the fee-for-service system is that it encourages providers to use scarce resources inefficiently. Evidence used to support this argument includes long stays in foster care and lengthy wait lists for some services. Per diem payments, in which providers are paid for each day that service is delivered to a client, are based on the length of time that services are delivered (and often the type or intensity of services). As with fee-for-service payments, per diem payments may encourage the inefficient use of scarce resources when clients are provided services for longer than might be necessary if alternative arrangements were available.(8) Under both these payment schemes, there is no financial incentive to change a service from one that is reimbursable to one that is not or that is reimbursable at a lower level. The states carry the financial risk for charges billed retrospectively for services already delivered.(9)
The perverse incentive argument underlies many states’ experimentation with alternative payments such as capitated rates, case rates, and block grants, which basically are prepayments for a service package. These payment methods allow some or all financial risk to be transferred to a private contractor, as payments are fixed and based on historical averages (and are sometimes dependent on geographic area and expected severity of need for services). They are made prospectively to cover all or a defined spread of services, which provides an incentive for contractors to control expenses in order to avoid losses and realize financial gains. Shifting from retrospective payment methods (fee-for-service and per diem) to prospective payments (capitated rates, case rates, and block grants) fundamentally changes the incentive system from one that offers incentives to retain cases on the caseload, to one with incentives for avoiding unnecessary placements or lengths of stay.(10)
Prospective payment systems in effect force the contractor to operate within a given budget or face financial loss?in managed care terminology, these schemes impose a financial risk on the contractor. The risks can be due to intensity, duration, or volume, all of which are discussed in more detail later in this section.(11) To shift the risk from the public child welfare agency to the private contractor, payments are fixed at a specified rate. The risk facing the contractor is that the costs of meeting the service needs of a group of clients may be greater than the payments for those services.
The types of risk-shifting payment methods that are most commonly used in states experimenting with managed care fiscal reforms are capitated rates, case rates, and block grants. Table 3-1 summarizes the source of risk faced by contractors in each payment method.
| Payment Method | Retrospective | Prospective | Source of Risk to Contractor |
|---|---|---|---|
| Fee-for-service | X | None | |
| Per diem | X | Intensity | |
| Capitated rate | X | Intensity | |
| Case rate | X | Intensity, duration | |
| Block grant | X | Intensity, duration, volume |
Capitated rates are paid on a per-case per-month basis?the contractor is paid monthly for all contracted services for an enrolled population. The contractor receives the predetermined monthly amount, based on a specified number of cases to be served, regardless of the level of services that the enrolled population requires. If the population requires more services or more intensive services than projected, the contractor faces financial risks. If there is an increase in the number of cases served, there would be an increase in payments; thus the contractor is not at risk for volume. And since the contractor is paid as long as services are provided, the contractor is not at risk based on duration of services; payments do not stop until cases are disenrolled. Similar in some ways to per diem payments, in that contractors under both payment mechanisms avoid volume and duration risk, capitated rates offer a flexibility that per diems do not. Contractors can change service intensity more easily and usually can offer wraparound services and other supports to enable a switch to lower-cost services or placements.
Case rates are a fixed fee paid to a contractor for all services delivered to a client over a treatment period or an episode of care. Contractors with case rate contracts are at financial risk if the intensity and duration of care are greater than expected. But they are not at financial risk if there is an increase in the number of cases served, since there would be an increase in payments. For example, a contractor may receive a flat case rate of $5,000 for each family referred; some families receive services for 3 months, and some receive services for 9 months, but the case rate is the same. The contractor receives the same payment amount for all the families.
Kansas’s initiative clarifies the difference between capitated rates and case rates. Kansas paid lead agencies an initial episode of care case rate for foster care and adoption. However, lead agencies experienced losses, and the state realized that some factors affecting permanency were beyond the control of the lead agencies. Kansas then changed to a capitated per child/per month payment system for foster care and adoption so that lead agencies no longer experience risk based on duration or lose money on children who do not move to permanency in a timely fashion. Contractors receive the monthly rate as long as a child receives services.
Unlike capitated and case rates in which contractors receive a payment for each case served, a block grant is a single payment that is made for a specified period, usually annually, for all cases served during the payment period. These types of payments are also called allocations, budget transfers, or capitation payments (not to be confused with capitated rates, described above). Under block grants, contractors may experience financial losses if the intensity, duration, or volume of service is greater than anticipated. For example, a contractor may receive an annual block grant and then must serve all referred cases in its jurisdiction, regardless of the number of cases or their intensity or duration of services.
Table 3-2 summarizes the fiscal characteristics of the initiatives. It shows, for each initiative, the payment basis, risk source, rate-setting method, risk management features, fiscal incentives, adequacy of payment (as reported by the contractor), and contractor’s financial status. Each of these is discussed below, except for payment basis and risk source, which were described previously. The overall cost of each initiative is not addressed, since complete information was not available.
| Initiative | Payment Basis | Risk Source | Rate-Setting Method | Risk Management | Fiscal Incentives | Payment Adequate | Contractor’s Financial Statusa/ |
|---|---|---|---|---|---|---|---|
| Arizona Family Builders |
Lead agencies receive a case rate, paid in three installments. | None (case closed if no progress) | Lead agencies’ cost estimates | Lead agencies close case if no progress after 6 months. | Case rate savings | Yes | Neutral |
| California Project Destiny |
Lead agencies receive a monthly case rate for 2 years. | Intensity Duration |
Historical costs for highest levels of care | Providers bear full risk but have some discretion over case decisionmaking. | Case rate savings | Yes | Neutral |
| Colorado Boulder County Managed Care Pilot Project |
County receives block grant and negotiates providers’ allocations and fee-for-service rates. | Intensity Duration Volume |
Historical data | County bears full risk. | Block grant savings | Yes | Neutral |
| Connecticut Continuum of Care |
Lead agencies receive a case rate, paid in four installments; they pay providers fee-for-service. | Intensity
Duration |
State’s historical cost for residential treatment | Lead agencies bear full risk. | None; savings are returned to the State. | No | Losses |
| Florida Coalition for Children and Families |
Lead agencies receive a block grant and must maintain time logs and justify their expenditures. | Intensity Duration Volume |
Prorated based on case counts | A statewide risk pool can be tapped in cases of excess referrals or catastrophic service costs. | Lead agencies can receive “excess earnings” of federal reimbursements as bonuses. | Yes | Neutral |
| Georgia Metropolitan Atlanta Alliance for Children (MAAC) |
Managed care organization receives a single per diem rate and pays providers per diems that were negotiated with the State. | Intensity | Average per diem for all levels of care | Managed care organization bears full risk but can refuse referrals. | Per diem savings | No | Losses |
| Illinois Performance Contracting |
Providers receive monthly administrative payments based on expected caseload ratios. | Volume | Historical data | State bears full risk. | Providers surpassing permanency standards can receive incentives; those not achieving standards lose referrals. | NA | NA |
| Kansas Public Private Partnerships |
Lead agencies receive capitated rates for foster care and adoption, and case rates for family preservation. | Intensity (foster care and adoption); Intensity and Duration (family preservation) | Historical data | Lead agencies bear full risk except that there is a risk corridor for foster care. | Capitated and case rate savings | NA | NA |
| Kentucky Quality Care |
Lead agency receives a case rate. | Intensity | Lead agency’s cost estimate | A stop-loss provision protects the lead agency. | Case rate savings | Yes | NA |
| Maryland Baltimore Child Welfare Managed Care Project |
Vendor receives a case rate. | Intensity Duration |
State’s historical cost | A stop-loss provision protects the vendor. | Case rate savings | No | Neutral |
| Massachusetts Family-Based Services |
Lead agencies receive block grant; service providers receive fee-for-service and per diem rates directly from the state; developing case rates. | Intensity Duration Volume |
NA | Lead agencies bear full risk for cost of case management; state bears full risk for costs of services. | Block grant savings; lead agencies may lose their contracts if they spend the services budget too quickly. | Yes | Neutral |
| Michigan Michigan Families |
Lead agencies receive case rates. | Intensity Duration |
State’s average cost over all children in all levels of care | Lead agencies have a risk corridor, can accumulate dollars in a risk pool and have discretion over cases accepted. | Case rate savings | Yes | Gains |
| Michigan Permanency Focused Reimbursement System |
Lead agencies receive case rates, partially based on performance, plus administrative per diems. | Intensity Duration |
State’s overall average costs for 5 years + 15 percent | State bears financial risk. Providers risk not receiving incentive payments if placements are not successful. | Case rate savings, plus lead agencies can receive incentive payments for successful placements. | Yes | Gains |
| Minnesota PACT 4 |
Lead agency receives block grant from pooled funds. | Intensity Duration Volume |
Based on county size and school enrollment | The counties bear full risk and can tap county reserves. | None | Yes | Neutral |
| Missouri Interdepartmental Initiative for Children with Severe Needs. |
Managed care organization receives a monthly case rate for 6 months plus fixed case management payment. | Intensity | Historical costs of highest level of care | The state covers part of any loss experienced by the managed care organization. | Case rate savings | No | Losses |
| New York Safe and Timely Adoptions and Reunifications (STAR) |
Provider agencies receive per diems. | None to providers | Historical data | The city bears full risk. | Providers can receive fiscal rewards based on permanency outcomes. | NA | NA |
| Ohio ProtectOhio |
Managed care organizations receive case rates. | Intensity | Historical data | Risk corridors established; county bears risk beyond the corridors. | Case rate savings | No | NA |
| Oklahoma Oklahoma Children’s Services |
Lead agencies and providers receive block grants. | None; state keeps referrals within established limits to avoid excessive costs to contractors. | Historical data on costs, number of children in care, and legislature’s allocation | Lead agencies stop serving families when block grant is spent. | None; savings are returned to the state. | No | Neutral |
| Pennsylvania Berkserve |
County paid providers fee-for-service and paid the lead agency a percentage of billable services for administrative costs. | Administrative cost | Historical data | Planned to establish a risk corridor and case rates (initiative has ceased). | Case rate savings, when fully implemented | No | Losses |
| Tennessee Continuum of Care |
Lead agencies receive per diems based on level of care. | Intensity | Independent time and cost study | Lead agencies bear full risk but can receive augmented rates in special cases and have some discretion over case decision-making. | For children that “step down,” agencies continue to receive initial per diem rate. | No | Losses |
| Texas Permanency Achieved Through Coordinated Efforts (PACE) |
Lead agency received a per diem. | Intensity Volume |
Average per diem | Lead agency bore full risk. | Lead agency could keep 10 percent of per diem savings. | No | Losses |
| Washington IV-E Waiver Demonstration |
Lead agency received a monthly case rate. | Intensity | Negotiated with provider | Lead agency bore full risk. | Case rate savings | No | Losses |
| Wisconsin Bureau of Milwaukee Child Welfare |
Lead agencies receive a case rate for in-home services and a block grant for out-of-home services (developing a case rate). | Duration | Case sample and needs assessment | If a lead agency experiences a deficit, the state will cover it as long as the agency is trying to control costs. | Lead agencies can receive fiscal rewards and penalties. | Yes | Neutral |
| a/ “Contractor” includes lead agencies, managed care organization, and service providers--any private nonprofit or for-profit organization that has a contract with the state to manage the delivery of services in order to achieve the objectives of the fiscal reform. | |||||||
Contractors’ financial risk arises from three sources: intensity (the level or costliness of services that must be provided), duration (the length of time that services must be provided), and volume (the number of clients who must be served). The principal source for the estimate of costs is historical data on the patterns of service usage and costs of providing services. The reliability of such data is clearly critical and notoriously poor. Beyond that, there is no consensus on a best method or formula for establishing payments that guarantees that the payment level itself will pose no financial risk to the contractor.
As can be seen in Table 3-2, states use a wide variety of methods to set payment rates, ranging from states’ historical costs for specific types of services, particular populations, or bundles of services across a sample of cases, to time and cost studies conducted by an independent entity. Generally, states use an average of some historical cost data for the populations and services, and sometimes the geographical area, that the payment is intended to cover. Whether the payment is adequate depends not only on the accuracy of the historical data but also on the appropriate selection of representative populations and services. For instance, in Baltimore’s Child Welfare Managed Care initiative, twice as many children received therapeutic care than had been included in the case sample on which the payment rate was based; as a result, the payment rate was lower than the actual cost of providing services. When this happens, contractors can attempt to get the rates raised or receive supplemental funding from the public agency, or they can cover the shortfall through other means such as fundraising from private sources. Otherwise the agencies may experience such financial losses that the initiatives cease operating, as did the initiatives in Texas and Washington.
In addition to using historical costs to set the payment rate, some states settle on a final rate after negotiating with the contractor. Other states increase the payment rate obtained from historical data by some percentage to take into account the possibility that rate-setting methods underestimate the cost. For instance, Michigan increased by 15 percent the payment that was based on the state’s overall average costs for 5 years.
MediCal Expansion Helps Children Return Home Before recent changes in California’s MediCal (Medicaid) regulations, children leaving residential treatment often lost benefits covering mental health services. Loss of mental health benefits meant that many children’s stays in residential facilities were prolonged because outpatient mental health services would be necessary to support their stability at home, and those services were unavailable or not covered by MediCal. Now, under California’s title XIX waiver, children discharged from residential treatment facilities are eligible for MediCal-covered mental health services to age 18. As a result of expanded MediCal coverage, children are now released to less restrictive family settings more quickly. |
States also base payments to contractors on their payments to non-initiative programs delivering services to a similar population. For example, California’s Project Destiny pays the same case rate to initiative contractors for the delivery of community-based wraparound services to children at risk of residential placement as they pay for residential placement. The objective of this payment system is to achieve cost neutrality. California also uses a control group to adjust case rates every 6 months and to ensure cost neutrality.(12)
Georgia and Texas use a variation of this payment-setting method. Both states’ initiative contractors are paid (or, in Texas, were paid, since the PACE initiative is no longer in operation) an average of the level-of-care per diems paid to non-initiative contractors. In Georgia, the managed care organization (MCO) contracts with a network of providers to deliver services in a variety of settings that range from regular foster care to residential treatment. The MCO receives the average of the range of per diems that the state pays directly to service providers. Then the MCO pays to its network members the same per diem rate that the state would pay them if the MCO were not the intermediary. In this payment arrangement, the MCO attempts to ensure that services are provided in the least costly setting. When services are delivered in higher-cost settings, the MCO pays the provider a higher per diem rate than the state pays the MCO. At the time of the interview, the MCO administrator reported that the initiative had a larger number of children in high-level care than had been anticipated. As a result, the MCO was facing a financial shortfall and taking proactive measures to reduce further loss. The administrator was both seeking an increase in the MCO’s per diem and avoiding entry of children with high-level needs into the initiative.
Since there clearly is no consensus on the best rate-setting method, the question arises as to how well the states have estimated the cost of services delivered by or through their contractors. One way to explore this question is to examine contractor reports of payment adequacy and the extent to which they have sustained financial gains or losses or achieved cost neutrality.(13) However, this analysis strategy is somewhat problematic because, as will be shown later, contractors typically have at their disposal a variety of ways to manage whatever budget is given to them.
Contractors entering into non-fee-for-service payment contracts may take on either full or partial financial risk. In a full-risk contract, the contractor absorbs all losses incurred as a result of providing services above those covered by the state payment, regardless of whether additional services or higher levels of care are deemed necessary. In the states using this approach, the amount of risk that the contractor is subject to is not explicit in the contract, and, in fact, neither the state nor the contractor is able to estimate accurately the extent of potential risk. As is depicted in Table 3-2, several of the initiatives feature contracts in which the contractors bear substantial or full risk. Somewhat more often, the contracts either explicitly limit contractors’ financial risk or contain risk-sharing agreements. Many of the states acknowledged that contractors are reluctant to take on full financial risk due to the inability to estimate accurately what that would cost. Requiring that they take full risk would likely result in contractors’ being unwilling or unable to participate in the initiatives.
Partial-risk contracts either explicitly limit contractors’ financial risk or contain risk-sharing agreements. Of these two types of partial-risk contracts, risk sharing is more common. The terms of partial-risk contracts vary considerably. Some states establish a risk pool from which contractors may draw down additional funds if their total service expenditures exceed the overall payment by a stipulated percentage. For instance, Florida’s lead agencies can access the risk pool if the number of children entering care is 5 percent more than expected. Other states’ contracts contain stop-loss provisions that stipulate the percentages of the total loss for which the contractor and state are liable. Maryland, for example, is responsible for 90 percent of the costs that exceed the contractor’s payments. Another variation is a risk corridor, in which a contractor is liable for a percentage of excessive costs. Beyond this percentage the state picks up the costs, and the contractor keeps a similar percentage of savings and returns the rest to the state. For example, in the first year of Ohio’s initiative, the contractors were responsible for the first 5 percent of costs that exceeded revenues and could keep the first 5 percent of “excess” revenues; that percentage rose to 10 percent in the second year, and 15 percent in the third and subsequent years. The next 10 percent of excess costs or revenues are shared equally by the contractors and the county, and beyond that the county is responsible.
Risk Regulation
Each of the three types of risk (volume, intensity, and duration) can be regulated by the contract. For instance, a contract can stipulate the number of children to be served by the contractor for the contract period and thereby limit the contractor’s exposure to volume risk. The contract may, on the other hand, contain a no-reject, no-eject clause. That is, the contractor may be prohibited from refusing referrals or discharging clients without state approval. This arrangement obviously places the contractor at greater volume risk. Similarly, the contractors’ exposure to duration risk can be limited by stipulating the length of time that treatment is to be provided. For instance, many states’ contracts stipulate that contractors are responsible for children’s care for a specified period regardless of the level of care needed. This type of contract exposes the contractor to greater risk if, overall, the level of provided care costs more than the total payment.
Not all administrators provided enough detailed information about their contracts to determine the extent to which states are using these types of contractual mechanisms to limit contractors’ financial risk. Typically, however, initiative contractors are not protected from risk due to delivering higher levels of care. In fact, the primary objective of using fiscal risk arrangements in many of the initiatives is to reduce the level of care that is provided. Contractors usually attempt to accomplish this objective by providing services in the least restrictive and least costly setting, usually in the community. In these types of arrangements, contractors are somewhat protected from intensity risk if they have partial- rather than full-risk contracts.
Managing Risk
Besides the risk-sharing provisions of their contracts, a number of other features of state initiatives enable contractors to better manage fiscal risk. Generally, initiative contractors that have some control over case referral, decisionmaking, and service planning are able to use these features to stay within their limited budgets. For instance, contractors that have authority to refuse case referrals can regulate the number of children with high-end needs that enter their programs. According to several contractors, the authority to refuse referrals has been critical to their ability to manage expenditures. In Georgia’s MAAC, for example, refusing a referral, if it appears that the child is at risk of needing high-end services, is a primary mechanism for managing financial risk because MAAC remains responsible for providing whatever level of care children need after they are accepted. MAAC is more likely to refuse high-end service users if a large number of children already in its care are receiving intensive services such as residential treatment. Conversely, contractors with no-reject, no-eject contracts may receive more children with high-end needs than their fixed budgets can support. No-reject, no-eject contracts contributed to financial losses for Missouri’s contractor and the demise of Texas’ PACE initiative.
Although having some authority in the referral process may enable contractors to better manage their budgets, unless the target population is clearly identified and the state and the contractor agree on the target population, contractors may mis-target their selection of cases. For instance, Michigan is currently revising its Michigan Families contracts to clarify the target population in response to selection by contractors of lower-need families into the program instead of the high-need children that the state had intended the program to target.
The extent to which contractors have discretion over case decisionmaking, including level of care and services provided, also influences how well they can manage fixed budgets. For example, in state initiatives such as California’s Project Destiny and Tennessee’s Continuum of Care, contractor discretion over level of care and services is particularly important because payment rates are based on an average level of care, and the program objective is to reduce the level of care. In these types of initiatives, contractors typically have substantial decisionmaking discretion over both level of care and service planning. One way that contractors use their decisionmaking discretion to step children down to lower levels of care is by delivering intensive services in settings that are less expensive than residential facilities or group homes. In turn, the contractors’ ability to deliver services in alternative settings such as foster or biological parents’ homes is closely linked to flexibility in funding.
Flexible Funding
Unlike categorical funding that requires providers to use child welfare dollars to deliver specific services in particular treatment settings, flexible funding gives contractors freedom to deliver a wider range of services and move children more freely between treatment settings. With flexible funding, instead of applying a limited set of categorical services to every case, contractors can develop an individualized treatment plan for each child. Hence, not every child receives a set of expensive services when more limited services may meet the individual child’s needs. Also, since flexible dollars follow the child rather than the service, contractors can more easily shift the child between service settings. For example, contractors may decide to deliver intensive in-home services instead of placing a child in an expensive residential treatment setting. Alternatively, the child may be placed for a short time in residential treatment but then be quickly moved into a community setting with intensive services.
Among interviewed contractors, flexible funding and the individualized treatment that it makes possible was one of the more popular features of the initiatives. From the contractors’ perspective, flexible funding and individualized treatment are necessary conditions for making the best treatment decisions. But in managed care, fiscal constraint is also intended to influence contractors’ decisions. When fiscal constraint enters into treatment decisions, contractors may, perhaps unconsciously, use individualized treatment planning as a tool to manage their budgets.
Although most contractors reported that their clients’ essential service needs are usually met, other comments they made reveal an apparent conflict between treatment and fiscal considerations. For instance, one lead agency reported that at the start of the initiative, its strategy had been to provide intensive community-based services at the beginning of a case to avoid placing children in higher levels of care. However, some children ultimately entered residential treatment. Consequently, the lead agency incurred losses. From this experience, the lead agency “learned to hold back on up-front services in case a child needed residential treatment later in the case.” Another contractor said that it could work within its budget only if cases are triaged as the agency approaches its budget limit. Other contractors told us that although they don’t require case managers to work within a set case budget, if the agency is “headed for financial trouble, that [information] is shared with workers.” These contractors’ comments suggest that treatment decisions depend not only on individual service needs but also on a contractor’s financial status at the time a decision is made. Hence, a child entering into care at the beginning of a budget cycle may have a different treatment plan than a child with similar needs but who enters care when the budget is closer to depletion.
Community Resources
Similar to flexible funding and individualized treatment plans, many contractors rely on community resources and informal supports to both meet some of the needs of children and reduce the level of their own resources that would otherwise be used to meet those needs. Contractors often reported that one of their major roles was to assist the family to “build up their own community support” or “set up [community] services.” In fact, some states’ case rates are based on the assumption that the contractor will rely extensively on existing community resources. For instance, the state administrator of an initiative designed to move children from residential care into communities said that the case rate would be adequate if the MCO used existing community resources and natural supports. If, on the other hand, the MCO was unable to tap into other resources, it is presumed that the state payment would not cover the purchase of needed services. In another initiative that provides services to families with children at risk of entering placement, a major objective of case management is to link families with informal support--family, friends, churches, community organizations--so that overall the state would cover only about 25 percent of the costs of services, with 75 percent coming from local resources.
Many child welfare advocates have pointed to the importance of linking families to ongoing community and informal supports in maintaining children in their local communities. However, it is not clear that these community resources are good substitutes for child welfare services. In addition, the strategy of reducing child welfare expenditures by relying more on community resources assumes that communities are well equipped to assist troubled families. This may not be the case, and if not, contractors who count on community resources to reduce their expenditures could face budget shortfalls. Indeed, a lack of appropriate community resources could be one reason that some contractors have been unable to prevent residential placements and, as a result, have experienced financial losses.
Of course contractors do not rely solely on the mechanisms discussed above to manage their budgets. Many contractors have developed utilization management systems to help them regulate expenditures; these systems range in sophistication from simple to complex. The more simple systems consist of frequent case reviews that examine lengths of stay and levels of care and develop plans to reduce both. On the more complex end, one contractor (in Kentucky) has developed software to predict costs based on a family assessment and the types and lengths of services needed. This same contractor tracks all of the costs of providing services to a family and the balance of the case rate. One of Michigan’s contractors created a new position of utilization manager. The manager tracks how many children are receiving various services, the length of time children receive services, and the number of slots that are open. Also, the manager is responsible for approving services that the caseworkers provide. Despite the differing levels of sophistication of contractors’ utilization management systems, there is unanimous agreement among contractors that budget oversight receives greater attention under the new payment arrangements.
The last three columns of Table 3-2 summarize the initiatives’ fiscal incentives and contractors’ reports on the adequacy of the state payment rates and whether the agencies achieved cost neutrality, suffered losses, or reaped gains. Where prospective payments (capitated rate, case rate, or block grant) are used, contractors generally can experience savings when their costs are less than the payments (which offsets the risk they bear when their costs are more than the payments), although some states (such as Connecticut and Texas) limit the amount of cost savings that contractors can keep. Other contractor incentives are tied to contractor performance (Illinois) or permanency outcomes (Michigan, New York, and Wisconsin).
When assessing the contractors’ reports, it should be kept in mind that the initiatives have been operating over different time periods. Some initiatives were implemented in the mid-1990s, and others began as recently as January 2000. Those contractors with a longer operating history may have achieved equilibrium between losses and gains either as a result of their greater experience with a payment system or adjustments to the original payment rates and other aspects of their contracts. Recently implemented initiatives, on the other hand, may not have had enough time to master the new fiscal arrangements or make appropriate modifications to problematic aspects of their contracts. This explanation of the variety of experience with fiscal arrangements, however, is not consistently supported across states. Administrators of both older and more recently implemented initiatives report inadequate payment levels and financial shortfalls.
With regard to payment adequacy and financial status, states generally fall into four classes:
Improved Foster Care Recruitment a Lasting Legacy of Project PACE The lead agency in Texas’s Project PACE used the flexibility provided by the title IV-E waiver to improve recruitment of new foster parents. Because the program accepted more than seven times the number of foster children specified in the contract, the lead agency had to invest heavily in foster parent recruitment. But the project went beyond the typical forms of outreach to potential foster parents. Project staff decided to approach it as a business, devising a marketing strategy as for a new product. They conducted polls and focus groups with potential foster parents to find out what their interests were and what obstacles might prevent people from becoming foster parents. This information was used to devise a highly effective outreach plan that attracted over 350 new foster parents. The lead agency then began to analyze the factors that led to disrupted placements for children. Having identified these factors, the lead agency developed extensive trainings for its foster parents to address the issues before they negatively affected children. Unfortunately, the quality of these services could not be achieved in a cost-neutral manner and the lead agency had to withdraw from its contract in 2001. |
Of the contractors reporting that their payments were inadequate, those who had financial losses and abandoned the initiative are obviously the more severe instances.
Pennsylvania, Texas, and Washington are the three state initiatives that had large financial losses and were abandoned. In Pennsylvania, the lead agency administrator reported that the agency lost as much as $1,500 per month; however, the reason given for the initiative’s demise was not financial. Instead, both the state and lead agency administrators said that the program ended because of extraordinarily cumbersome administrative procedures, high lead agency staff attrition that necessitated recurrent intensive training, and public agency workers’ resistance. Of course, all of the cited reasons are likely to have driven the lead agency’s administrative costs upward.
The Texas initiative was terminated as a direct consequence of the payment rate. Generally, the average state reimbursement is 87 percent of any contractor’s actual cost. Contractors make up the difference through private fundraising. Because the initiative’s contractor received many more cases than it had anticipated, its board decided that the agency would be unable to make up the difference with private funding and asked the state to increase the per diem from $77 to $92. Because the state was willing to increase the rate to only $82/day, the contractor’s board did not renew the contract.
Washington’s initiative was terminated because the case rate was half of what the contractor actually needed to cover the costs of delivering services. In fact, the contractor estimated that the agency lost $80,000 a month on the program. According to the contractor, this large loss occurred primarily because many more children needing intensive services were referred to the program than had been anticipated.
Six other states report inadequate payment rates (Maryland and Oklahoma) and financial losses (Connecticut, Georgia, Missouri, and Tennessee), but continue to deliver services under their fiscal reform contracts. Among these six states, the reason cited most often for financial losses was the unexpectedly high volume of children needing more expensive services such as placement in residential treatment facilities and therapeutic foster care. Only one contractor reported sustaining financial losses because the agency delivered services that were not covered by the contract. The contractor believed that the services-in-home aftercare?were necessary to reduce children’s lengths of stay in residential treatment. However, he speculated that if these services had not been provided, the agency’s losses might have been even larger.
Only one of the four currently operating contractors with losses had explicit risk-sharing provisions in their contracts at the time of the loss, and that state (Missouri) covered part of the contractor’s financial loss. The remaining contractors address their financial losses in a number of other ways. Some attempt to make up losses through private fundraising. More often, agencies sustaining or anticipating a financial loss try to reduce their costs over the remainder of the year by providing fewer high-cost services or reducing the number of children in their care who need high-level services. At any rate, most contractors with or anticipating losses managed to stay in business.
Contractors reporting that their payments are adequate often did so with some reservation. For instance, contractors in three states commented that they were able to work within their budgets by triaging or rationing services. Two other contractors said that their payments were adequate to cover the costs of “essential” services but that additional funding would be needed in order to deliver longer-term rehabilitation or to reduce caseloads.
Contractors in only one state had actually gained financially from managed care fiscal reforms. In one of the two initiatives that Michigan has implemented, Permanency Focused Reimbursement System, the contractor attributed its gains to the fact that the performance-based case rates had increased faster than the alternative per diem rates that non-initiative contractors received. The agency used its unexpended payments to purchase independent research on the impact of services on different populations. Pending a review of other program outcomes, such as reducing placement disruption and lengths of stay, both the contractor and state consider this program to be successful.
Michigan’s other program, Michigan Families, has also resulted in financial gains for at least one contractor but is not considered to have been completely successful because the savings were achieved by serving a less needy population than the state had intended the program to target. Contractors put any unexpended funds into an agency risk pool, but it is very unlikely that these funds will be used for services unless the program serves more needy families. In response to the current situation, the state is revising the program contract and plans to seek bids from new contractors.
The above description of states’ attempts to reform their payment arrangements with service contractors to achieve multiple goals such as improving services, shortening lengths of stay in foster care, and reducing foster care costs, highlights the complexities that such initiatives engender. Reform efforts generally are not limited to changes in contractor reimbursements; they also encompass a shift from categorical to flexible funding. Flexible funding, in turn, enables contractors to individualize treatment plans and deliver different types of services in non-residential treatment settings. Components of the reform efforts--fiscal arrangements, flexible use of funding, and community-based services--are tightly linked. Flexible funding allows contractors greater discretion over treatment decisions, including what and where services are provided, and fixed budgets are intended to encourage contractors to deliver less expensive services in lower cost settings whenever appropriate given the child and family’s needs. To some extent then, the greater flexibility that these new arrangements afford enable contractors to control the costs of delivering services.
A majority of contractors managed to operate within the limited budgets imposed by fixed payment rates. Many of these contractors had greater discretion over intake, discharge, and treatment and were therefore in a better position to control the types and duration of services delivered and hence the agencies’ costs. Some contractors were also able to reduce their costs by supplementing the services that were provided directly with those available from other community agencies and informal supporters.
Maintaining Incentives in Illinois Contractors with superior performance in moving children to permanency are rewarded in Illinois, where the Foster Care Performance Contracting Initiative allows high performers to lower their caseloads, ensure their contract levels, and enhance their programs. An ongoing challenge is to devise a plan that works in both urban and rural areas: how can the best performing agencies outside of urban Cook County maintain a secure contract base with a sufficient number of referrals to replace children who move to permanency? The problem is that outside of Cook County (where there is a high ongoing demand for child welfare services), the relatively sparse population meant that cases did not roll in fast enough to keep up the numbers in the high-performing agencies, once caseload reductions were achieved through faster permanency. One solution is to give a $2,000 bonus to high performers in downstate agencies for each child over the required 33 percent moved to permanency and make a commitment to target referral to those agencies during the following year. Other options being explored include transferring cases from low to high performers at transition times such as worker assignment changes, giving top performing agencies every third referral while giving middle performing agencies every fifth referral, and establishing different rate levels. |
Nevertheless, in those states where contractors incurred substantial financial losses, payment rates obviously did not cover the cost of services that contractors determined were necessary to address the needs of the populations served. In some instances, for example Texas, the discrepancy between the payment rate and the contractor’s costs may have been a consequence of mis-targeting--serving a population with a larger proportion of high-end service users than was intended. On the other hand, state administrators argue that the payment rates would have been adequate if only the contractors had made the right decisions with regard to the types and duration of services delivered. This conflict in perspectives underscores the difficulty that both state administrators and contractors often face in accurately targeting particular services and predicting case trajectories.
Finally, there is the question of whether the fiscal reforms address the alleged perverse economic incentives of the fee for service system. Overall, contractors report that they are monitoring their budgets more carefully at both the program and case levels. At the case level, contractors generally attempt to avoid more costly services and residential settings whenever possible. If permitted and other circumstances are conducive, some contractors avoid serving potentially high cost cases in order to limit their financial risk. So, as intended, the fiscal reforms do appear to have some effect on contractors’ cost consciousness.
However, the fiscal reforms may introduce their own set of perverse outcomes. In particular, over-emphasis on the cost of providing services may unduly influence contractors’ decisions regarding problem assessment and treatment at the expense of effectiveness. For instance, if budgetary concerns blur providers’ judgments, they may tend to minimize the extensiveness of families’ problems and overestimate the effectiveness of weak treatments. This is, however, a potential dynamic, not a documented one. Assessing any perverse effects that the fiscal reforms may introduce will depend on implementing ongoing systems to carefully monitor child and family outcomes. Many states have thus far been hesitant to implement such systems primarily because there is no consensus about what outcomes should be monitored, and measurement tools are still evolving.
(8) In addition, these payment mechanisms afford little flexibility in treatment; the services provided must be on the predefined list of reimbursable services. Many fiscal reforms attempted to open up the range of services through more flexible funding mechanisms.
(9) Under per diem payments, providers may bear some financial risk if the services needed cost more than had been anticipated in setting the per diem, and “level-of-care” per diems are not available.
(10) It is important to note that federal reimbursement under title IV-E for foster care days is viewed by many as a major impediment to implementing fiscal reforms in child welfare, due to IV-E’s categorical per diem reimbursement structure.
(11) In his article “Federal Fiscal Reform in Child Welfare Services,” Wulczyn (2000) identified volume, duration, and unit cost as the three variables that both determine the total cost and financial risk of providing child welfare services. In this report, level of care (intensity) is substituted for unit cost because none of the state-provider contracts in the states interviewed were based on the unit costs of individual services. Instead, payment rates are typically based on the average cost of providing bundles of services or levels of care to specific populations.
(12) The purpose of Project Destiny’s financing arrangements are not to reduce costs, but to provide quality services in the least restrictive settings at no additional cost?to spend no more on nonresidential settings than they would have on residential treatment. In the long term, administrators hope to reduce costs as a result of fewer re-entries into the system and lower use of residential treatment facilities. They see the initiative as a long-term investment.
(13) In some states, there was disagreement between state administrators and contractors’ reports regarding the adequacy of payment rates. Where there were such differences, state administrators typically reported that payment adequacy was contingent on good financial management. On the other hand, although they may generally be more inclined to report that payment rates are inadequate, most contractors substantiated their claims with specific ways in which underfunding had negatively affected the management and delivery of services and the financial status of programs.
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